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Insurance Companies — Now Time to Deal with GST Changes and Increased Audits

Canadian Tax Adviser

March 8, 2013

Insurance companies are in the midst of another round of changes to indirect tax laws and administrative policies. These changes include the imminent return to GST and PST in British Columbia, recent changes to the Quebec Sales Tax (QST) affecting financial services and increased CRA audit activities related to GST/HST on various transactions including cross-border charges from related entities.

Many changes like these over the last few years, particularly the 2010 GST/HST changes for financial institutions, have proven to be a challenge for financial institutions to implement. The sheer volume and complexity of these changes, the required system adjustments, and tax policy changes have all made it difficult to calculate and pay the right amount of taxes and fully comply with all the GST/HST, provincial sales tax/retail sales tax (PST/RST) and QST rules.

Not dealing with all of these changes or simply misunderstanding them may lead to significant amounts of money being lost to non-compliance penalties or audit disputes, or simply left as unclaimed recoveries.

Return to GST and PST in British ColumbiaInsurance companies still have time to do proper planning before the return to GST and PST in British Columbia takes effect on April 1, 2013. For example, you will need to modify your systems to deal with these changes, including self-assessment on taxable goods acquired outside B.C. for use or consumption in B.C. Some savings opportunities for PST may still be available, depending on your situation. You may benefit from acquiring items before April 1, 2013 that would be subject to the new PST.

New QST rules for financial services As an insurance company, you should already be dealing with the new QST legislative and compliance rules that became effective on January 1, 2013.

For example, the change to QST-exempt status for financial services will likely increase your QST cost despite the changes to the compensation tax. Many financial institutions will see an increase in their operating costs and are looking for ways to manage these costs. Also, as part of new compliance rules, you may have to start tracking various data in your systems as early as January 1, 2013, including QST costs, in order to effectively fulfill your new administrative requirements in the coming months.

The changes in B.C. and Quebec will affect the blended rates charged on fees to your segregated funds.

CRA audit activities prove expensive for insurance companiesWith a significant number of new GST/HST auditors, the CRA appears to be increasing its audit activities for all financial institutions including insurance companies.

Specifically, the CRA has recently started to audit insurance companies and assess GST/HST on various transactions including cross-border charges from affiliates (e.g., reinsurance) and imported taxable supplies. Insurance companies are required to self-assess tax on all deductible expenses from outside Canada, with certain exceptions. The audit period for these self-assessment rules is seven years (increased from the general four-year audit period).

Further, the CRA continues to focus on the GST/HST status of services known as “arranging for” financial services, making it important to ensure you understand the tax status of your supplies and purchases.

Also, the CRA is focusing on allocation methods used by financial institutions to calculate input tax credits. Keep in mind that once a financial institution uses a method for a year, it may not be able to change the method without the CRA’s approval. Also, certain insurance companies are required to apply for the CRA’s permission to use particular methods for claiming input tax credits.

Good time to deal with challenges With all these and other changes happening and the CRA increasing its audit activities, it may be a good time to have an indirect tax review to identify both your compliance issues and planning opportunities to recover tax, and to help ensure that your systems and processes can deal with these challenges.

Information is current to March 8, 2013. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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